How to Apply for a Federal Tax Lien Discharge

A federal tax lien is a legal claim the government places on your property when you fail to pay a tax debt, attaching to all your assets like real estate and financial accounts. To sell or transfer a specific piece of property free of this claim, you may need a certificate of discharge. A discharge removes the lien from that particular asset, allowing for a clean transfer to a new owner, while the lien remains on your other property.

A discharge is not the same as a full lien release, which only occurs when the tax liability is fully paid or becomes legally unenforceable. It is also distinct from a lien withdrawal, which removes the public Notice of Federal Tax Lien, often because the notice was filed in error or other specific criteria were met.

Grounds for a Discharge

The Internal Revenue Service (IRS) may grant a certificate of discharge under specific conditions outlined in Internal Revenue Code Section 6325. One common basis is when the property to be sold has no equity value for the IRS. This occurs when the property’s fair market value is less than the total of liens that have priority over the federal tax lien, such as a primary mortgage. For example, if a home is valued at $300,000 but has a $320,000 mortgage, the IRS’s interest is worthless, and it may grant a discharge.

Another scenario involves paying the IRS an amount equal to its interest in the property. If a property is being sold, the IRS may agree to a discharge if it receives the net proceeds of the sale up to the value of its lien. For instance, if a property worth $400,000 has a $350,000 mortgage, the IRS has a $50,000 interest and a discharge could be granted upon payment of this amount from the sale proceeds.

The IRS may also issue a discharge if the value of the taxpayer’s remaining property is at least double the amount of the tax debt plus any other debts that have priority over the tax lien. This provision ensures the government’s interest remains protected by the taxpayer’s other assets. A discharge may also be issued if the government’s interest in the property is determined to be valueless or if the sale proceeds are held in escrow under an agreement with the government.

Required Information and Documentation

Applying for a discharge requires Form 14135, Application for Discharge of Property From Federal Tax Lien. A complete application package must include several supporting documents:

• A copy of the Notice of Federal Tax Lien for which the discharge is sought.
• A current appraisal of the property from a qualified, disinterested appraiser.
• A copy of the proposed purchase and sale agreement if the property is being sold.
• A preliminary title report that details all liens and encumbrances on the property.

Filling out Form 14135 involves providing taxpayer information exactly as it appears on the lien notice, including your name, address, and taxpayer identification number. You must also provide information for the applicant if it is someone other than the taxpayer, such as the property’s buyer.

The form requires a detailed description of the property and its current value, supported by the appraisal. You must also clearly state the basis for the discharge that matches your circumstances. For example, if arguing the IRS’s interest is valueless, you must attach the title report and other documents proving senior liens exceed the property’s value.

The Application Process

The IRS advises submitting the application at least 45 days before the certificate is needed to allow for adequate processing and review time. The completed application package must be mailed to the IRS Advisory Consolidated Receipts office in Florence, Kentucky. For specific questions, you may need to contact the Collection Advisory Group that serves your geographic area, with addresses listed in IRS Publication 4235.

After mailing the application, the IRS will assign it to an employee for review. They will analyze the provided documents, such as the appraisal and title report, to verify the information and determine if the request meets the legal requirements for a discharge. If the application is incomplete or additional information is needed, the assigned IRS employee will contact you or your authorized representative.

Post-Application Procedures and Closing

Following the review and preliminary approval, the agency will issue a Conditional Commitment Letter for Discharge. This document outlines the specific requirements that must be met before the final certificate is issued. The letter will state the amount of money, if any, that must be paid to the IRS to secure the discharge, based on the value of the government’s interest in the property.

The payment to the IRS is handled during the property’s closing or settlement. The conditional commitment letter serves as an instruction to the closing or escrow agent, directing them to remit the specified payment directly to the IRS from the sale proceeds. This ensures the government receives its funds before or at the time the property title is transferred.

Once the closing agent has confirmed the payment and satisfied all other conditions, the IRS will issue the final Certificate of Discharge of Property from Federal Tax Lien. This official document legally removes the federal tax lien from the specific property. The final step is to ensure this certificate is properly recorded with the local county or municipal office for property records, which provides public notice and clears the property’s title.